# CGT and depreciation

#### coolcup69

I have a question regarding calculating the appropriate cost base when selling an investment property.

Let's say the unit was bought for \$300k (including all associated costs) at the start of a financial year but depreciation of \$10k a year has been claimed for the last 5 years (prime cost method). So the adjusted cost base at the start of this financial year is \$250k.

Now, let's say I am selling the unit on December 31. Can I claim half a full year's depreciation in my income tax as an income deduction (ie \$5k) and reduce this from the cost base when calculating my CGT?

I have a load of capital losses so it would be beneficial for me to be able to depreciate the asset as much as possible and maximise the capital gain (which will be absorbed by my carried forward losses).

Also, a second order question - can carried forward capital losses on shares be applied against capital gains on investment properties?

Many thanks!!!

I have a question regarding calculating the appropriate cost base when selling an investment property.

Now, let's say I am selling the unit on December 31. Can I claim half a full year's depreciation in my income tax as an income deduction (ie \$5k) and reduce this from the cost base when calculating my CGT?

I have a load of capital losses so it would be beneficial for me to be able to depreciate the asset as much as possible and maximise the capital gain (which will be absorbed by my carried forward losses).

Also, a second order question - can carried forward capital losses on shares be applied against capital gains on investment properties?

Many thanks!!!

Yes.
Yes....Just remember that the losses reduce the full gain first so that the net value is then subject to the 50% discount...Many think they calc the taxable gain and reduce it for losses. Sorry. So if your losses were \$150 and your gains \$200 then \$50k net is then reduced by 50%. ie \$25 is taxed. ..Its not 50% x \$200 = \$100-\$150 = (\$50)...

Thank you!

If, at the start of the tax year, the tenants have moved out and I decide to sell the property with vacant possession, am I allowed to claim any tax deductions like depreciation up to the point of sale? I am now thinking that given the property is not being rented out, perhaps I can't claim anything?

Hi guys,

I'd really appreciate some feedback on the below question if possible. In case I have not phrased it correctly, the situation I find myself is as follows:

1. Tenants were in the property till 30 June 2014 and then moved out (ie no rental income in 2014/15 tax year)
2. I repainted the property on 7 July 2014
3. I have now embarked on a sales campaign to sell the property

Are any expenses I incur after the tenants leave deductible in the 2014/2015 tax year? I am thinking primarily of:

(a) the repainting (it was to fix what the wear and tear of the previous tenancy)
(b) any additional depreciation allowances I can make till the disposal date (ie higher capital gain but larger deduction against income)
(c) any interest charges from the bank?

I am a bit concerned because if some of the expenses outlined above are deductible, will it look odd to submit a tax return in 2014/15 with no rental income but with self-assessed deductions?

Many thanks for any responses.

Hi guys,

I'd really appreciate some feedback on the below question if possible. In case I have not phrased it correctly, the situation I find myself is as follows:

1. Tenants were in the property till 30 June 2014 and then moved out (ie no rental income in 2014/15 tax year)
2. I repainted the property on 7 July 2014
3. I have now embarked on a sales campaign to sell the property

Are any expenses I incur after the tenants leave deductible in the 2014/2015 tax year? I am thinking primarily of:

(a) the repainting (it was to fix what the wear and tear of the previous tenancy)
(b) any additional depreciation allowances I can make till the disposal date (ie higher capital gain but larger deduction against income)
(c) any interest charges from the bank?

I am a bit concerned because if some of the expenses outlined above are deductible, will it look odd to submit a tax return in 2014/15 with no rental income but with self-assessed deductions?

Many thanks for any responses.

Im no brain surgeon but if you have no tenant for 14/15 year and are not going to relet it but actually put it to market I cannot see how you can claim anything in that financial year.
Macca446

You can claim for repairs after a tenancy has ended. No problem there.
The complication will be that the repairs were done in a different tax year to when the tenancy ceased.
From an ATO publication:

If you no longer rent the property, the cost of repairs may still be deductible provided:
the need for the repairs is related to the period in which the property was used by you to produce income, and
the property was income-producing during the income year in which you incurred the cost of repairs.

Maybe a silly question but if you can afford to hold without claiming depreciation would you be better off not to claim it ? (if you were going to sell)

Maybe a silly question but if you can afford to hold without claiming depreciation would you be better off not to claim it ? (if you were going to sell)

It depends. My point of view is as follows.

If I depreciate the asset, my cost base reduces, my CGT rises but I get a CGT discount as I have held the asset for more than a year, so I only pay tax on half the gain. I also have a 100% deduction for the depreciation I take on. As an example, say I depreciate \$100 and my marginal tax rate is 50% (for ease of numbers). My CGT liability is (\$100 x 50% tax rate x 50% CGT discount) \$25. My deduction against income is (\$100 x 50% tax rate) \$50. So a net \$25 benefit.

This becomes even better if I have carried forward CGT losses, so I don't actually pay any additional CGT due to the lower cost base as a result of depreciating.

Thanks Depreciator and Macca. I agree with you both, I don't think I can incur any deductions.

Pretty sure that if the IP is available for rent then you can still clsim deductions even though IP is empty. Only drawback is that you may find a tenant and it will be sold as such.

Only drawback is that you may find a tenant and it will be sold as such.

Sorry Datto - I don't understand the drawback you are referring to here?

What if you want to sell the IP with vacant possession and you keep the IP available for rent with your PM. You've got the IP on the market for sale with vacant possession and then all of a sudden you have a tenant. The drawback is having to sell IP with a tenant .

If, at the start of the tax year, the tenants have moved out and I decide to sell the property with vacant possession, am I allowed to claim any tax deductions like depreciation up to the point of sale? I am now thinking that given the property is not being rented out, perhaps I can't claim anything?

According to a few early AAT cases, no deductions for interest or repairs on the basis that these are now capital expenses associated solely with the sale of the property.

Similar arguments could be put forward for depreciation and capital works deductions, now solely held for sale.

The key date could be when you resolved to sell the property, which should be backed up by evidence.

Maybe get a private ruling or legal advice since it involves interpretation that has not been tested in the courts as far as I am aware.

Thanks Rob G and Gatto. I think I'll just treat them as costs I can't deduct. I assume the cost of painting can be added to the cost base of the asset to reduce the CGT liability on sale? I don't think I can add the interest cost to the cost base though.

If it's a decent amount, get a Private Ruling as Rob suggested. It's free and really easy - download the form and fax (yes) it to the ATO. They will probably call you for clarification, and then issue the Ruling. I've done it a dozen times.

It depends. My point of view is as follows.

If I depreciate the asset, my cost base reduces, my CGT rises but I get a CGT discount as I have held the asset for more than a year, so I only pay tax on half the gain. I also have a 100% deduction for the depreciation I take on. As an example, say I depreciate \$100 and my marginal tax rate is 50% (for ease of numbers). My CGT liability is (\$100 x 50% tax rate x 50% CGT discount) \$25. My deduction against income is (\$100 x 50% tax rate) \$50. So a net \$25 benefit.

This becomes even better if I have carried forward CGT losses, so I don't actually pay any additional CGT due to the lower cost base as a result of depreciating.

I thought about this some more, if you claim depreciation straight away you are claiming it in today's money (so to speak) so if you delay it then inflation will have eroded it. Does anyone agree ?

According to a few early AAT cases, no deductions for interest or repairs on the basis that these are now capital expenses associated solely with the sale of the property.

Similar arguments could be put forward for depreciation and capital works deductions, now solely held for sale.

The key date could be when you resolved to sell the property, which should be backed up by evidence.

Maybe get a private ruling or legal advice since it involves interpretation that has not been tested in the courts as far as I am aware.

If its a new deck or improvement sure. But if its to correct rental era defects - ie repainting then its likely to be deductible.

Maybe a silly question but if you can afford to hold without claiming depreciation would you be better off not to claim it ? (if you were going to sell)

If you hold a QS report the cost base adjustment still occurs. You cant choose to ignore it. The tax law basically says "could have deducted" with respect to CGT cost base adjustments....On the contrary if there is no QS report then you cant ascertain the deduction and there isn't a issue.

I have a similar / related question on this topic - CGT and depreciation.

Have just sold an IP. I understand that the CGT = sale price - adjusted cost base. Depreciation has been claimed as tax deductible expense over the years. So, depreciation must be subtracted from cost base for CGT purposes.

There are 2 depreciation items: depreciation on capital items and depreciation on building / capital works. Question is: Do I subtract both of these for CGT, or only the depreciation on building / capital works? I read in one of the websites, it only mentioned capital work depreciation, so am a bit confused.

Thanks for any clarification.

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